Will you get a mini-budget tax boost?

Although the spring Budget remains the Chancellor’s primary opportunity for raising or reducing taxes – or both – the Autumn Statement plays an increasingly significant role. He often uses it to introduce policies that will take effect only in the future. Or, more subtly, he uses the speech to indicate a “direction of travel” in how he intends to tax certain assets or incomes, or how he wants to encourage certain behaviour among savers, employers and employees.

Based on previous announcements, leaks and expert surmises, the following are the topics he is likely to address next Thursday.

Income tax and personal allowances

Tax rates aren’t expected to change, but George Osborne is likely to tinker with the personal allowance (the amount everyone can earn before tax applies) and possibly also the threshold at which the higher, 40pc level of tax kicks in. As the graph shows, Mr Osborne has pushed up the personal allowance – in line with a Liberal Democrat pledge – to exclude greater numbers of low earners from the tax net. To pay for this, he took the unprecedented step of lowering the higher-rate threshold, dragging record numbers of people into the 40pc bracket.

He could continue this trend, effectively redistributing income from higher to lower earners. Or might he use Thursday’s speech to offer a bit of a giveaway to higher earners by leaving the threshold where it is – or even raising it?

George Bull, a partner at accountancy firm Baker Tilly, said: “There was a time when the 40pc tax bracket was unusual, to the extent that there was some status in paying that rate. Not now – it hits too many people.” Mr Bull said the likelihood of any substantial giveaway to higher earners, in the form of an increased threshold, was low.

Experts at rival firm PwC agreed. They put the cost of raising the personal allowance by £500 at a hefty £2.5bn, suggesting that further concessions to those higher up the income ladder were unlikely.

One effect of threshold manipulation is to obscure the overall amount of tax paid by individuals, especially if they have multiple income sources. Piecemeal tinkering also enables chancellors to make attractive-sounding gestures, such as the 10pc rate on savings income, which in practice have limited effect (see Expert View, below).

Isas

Mr Osborne is expected to ignore calls to relax Isa rules by, for example, equalising the annual limits applying to cash savings (£5,760 this tax year) with those that apply to investments in shares (£11,520). This would cost too much, as cash Isas account for more than £40bn of the £60bn annual contributions – even under today’s less flexible system.

He might make equity Isas more inclusive, however, by allowing new investments, such as peer-to-peer loans, to qualify as Isa holdings. This form of lending bypasses banks and connects investors with borrowers online, at highly attractive rates.

More worrying are hints that Isas could be subject to an overall lifetime cap of £500,000 or even £100,000, beyond which the assets would become taxable. This would echo the cap applied to pensions and the emerging trend to remove or reduce reliefs available to the asset-rich. There are no figures for the value of Isa accounts but at the extreme end it is estimated that only a handful have amassed Isa assets of more than £1m.

Over time a far lower cap could snare many of the 14 million investors who contribute annually to an Isa. Investing today’s full allowance of £11,520 each year for the next 20, for example, would generate £500,000 if annual returns averaged 6.5pc.

Pensions

Action is afoot here, with the Government apparently increasingly concerned that too much pension tax relief is being enjoyed by the very wealthy. Two pincers are being applied to reduce these benefits: from April, the lifetime pension cap, above which assets are taxed, drops from £1.5m to £1.25m. And the maximum annual contribution made by any individual in a tax year will drop from £50,000 to £40,000. These are powerful disincentives to investing in pensions, which also affect long-serving – but not necessarily highly paid – professionals such as doctors, whose pension pots might tip over the limits because of their length of service.

Now there is a suggestion that, as in Ireland, the Government could cap the tax-free lump sum that savers can withdraw from age 55. In Ireland the cap strikes at €200,000 (£166,000).

Inheritance tax

Here Mr Osborne is expected to tighten rules under which the tax is legitimately avoided, rather than by introducing changes to thresholds or rates. One area expected to receive attention is the use of trusts to protect assets. The Government might, for instance, make it more onerous for those seeking to set up multiple trusts by increasing the charges applied to the assets held within them. This would make this method of IHT avoidance less attractive.

Property taxes

The likelihood of applying capital gains tax to profits made by non-residents on property in Britain has been widely trailed. This would align the UK with most other countries. But, say experts, other similar taxes aimed at the wealthy could be in the offing. Many believe further increases in stamp duty at the very top end of the market are on the cards. From last year a top rate of 7pc has applied to properties costing more than £2m – or 15pc if they are bought through a company.

Far more dramatic would be a reduction in stamp duty on cheaper properties, helping first-time buyers. Duty of 3pc now applies to properties worth between £250,000 and £500,000. Paul Emery, stamp duty expert at PwC, said: “Looking at the value of sales in recent years, reducing the current 3pc stamp duty rate to 2pc would cost around £150m. It would also help smooth the cliff edge between properties outside the threshold and those just within it.”

Other measures

Further details on tax breaks for married couples could emerge – along with an announcement on the treatment of child trust fund savings, and how these could be swept into Junior Isa accounts.

Energy bills might also be addressed, with Mr Osborne announcing that the estimated £53-a-year levy applied to every bill, supposedly to fund energy-efficiency measures, should be scrapped and the money raised elsewhere.